The Hidden Price of Buy Now Pay Later Services
The buy now, pay later services have taken the world by storm especially during the pandemic, with the industry seeing a 90 per cent increase in transactions last financial year. While the convenience of having the total price split into instalments is undeniable, new figures show that consistent spending through these payment schemes could accumulate to the repayments equalling those of a small car with a personal loan.
Afterpay, Zip Money and Humm allow consumers to buy a product immediately using the company’s money and pay it back in instalments. For example, when you buy something with Afterpay, the company pays for your purchase at no cost to you (unless your repayment is late), you just need to pay it back in instalments. Just like with credit card or credit limit, Afterpay restricts spending for its users. In this day and age, there are more buy now, pay later services on offer than ever before. To see what each of them offers, visit this link.
While it’s easy to use these services, it’s just as easy to lose track and overspend. New research by Canstar revealed that if an Afterpay customer has a purchasing limit of $1000, which is $250 per fortnight to repay, it would be the same as if they had:
- Bought an 87-night cruise around the world on a credit card - $15,200 paying it off over three years, or
- Used a personal loan to buy a car valued at about $15,990 paying it off over three years.
Compare it to doing fortnightly Afterpay repayments of $250 - over three years you would have paid back $19,500.
The best way to think about buy now, pay later services is to treat it the same as taking on any other loan. While you get the immediate shopping hit without having to pay the full price upfront and no interest, it encourages shoppers to spend more. ACCC found that 55 per cent of consumers reported they are spending more than they did before buy now, pay later services and during the pandemic the use of the services has increased by 18 per cent.
If you’re thinking of buying a home, you should be wary of the debt you can potentially accumulate through these services.
It is unlikely that a lender would refuse you a loan because you have an account with a buy now, pay later service however they will take your spending behaviour into consideration which could negatively affect your credit score (especially if you've ever been late with a repayment).
The best recommendation is to give yourself a six-month financial digital detox before applying for a mortgage loan, this means zero use of the services that can affect your credit score and ability to secure a home loan.
Curious to find out what else you could be doing to benefit your mortgage loan application or what options might be already available for you? Speak to a mortgage broker today.